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Titre original : Simple and Compound Interest

Transféré par Gyle Contawe Garcia

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- The Time Value of Money
- A PROBS
- ch06
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- Columbia v. Seirus - Order Awarding Prejudgment Interest
- TimeValueMoneyP1
- Time Value of Money
- ICF_Lecture 2_Time Value of Money

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Compound Interest

Simple Interest

Suppose you won P10,000 and you

plan to invest it for 5 years. A

cooperative group offers 2% simple

interest rate per year. A bank offers

2% compounded annually. Which

will you choose and why?

Solution:

Simple interest, with annual rate r

Time(t) Principal Simple Interest Amount after t years

(P) (Maturity Value

Solution Answer

Solution:

Compound Interest, with annual rate r

Time Amount Compound Interest Amount at the end of year t

(t) at the (Maturity Value)

start of

year t

Solution Answer

1 10,000 (10,000)(0.02)(1) 200 10,000 + 200 = 10,200

2 10,200 (10,200)(0.02)(1) 204 10,200 + 204 = 10,404

3 10,404 (10,404)(0.02)(1) 208.08 10,404 + 208.08 = 10,612.08

4 10,612.08 (10,612.08)(0.02)(1) 212.24 10,612.08+ 212.24 = 10,824.32

Compare the interests gained in two

investments.

Compound Interest (in pesos) 11,040.81 – 10,000 = 1, 040.81

interest?

investment term. In compound interest, the interest from

the previous year also earns interest. Thus, the interest

grows every year.

Note that the rate r is expressed in percent. Thus, do not forget

to convert it to decimals when used in the computations. The

time t is normally expressed in years. In cases that time is

expressed in months or days, do not forget to convert it to its

equivalent number of years using the following conversion

formulas:

𝑛

t= years

12

𝑚 𝑚

t= years or t = depending on the requirement in the

360 365

problem

Simple Interest

To compute for the simple interest, we apply the formula:

I = Prt

use the following formulas to compute for P, r, and t

respectively.

𝐼

P=

𝑟𝑡

𝐼

r=

𝑃𝑡

𝐼

t=

𝑃𝑟

Example 1:

Issa deposited Php 10,000 in a bank that offers a

simple interest rate of 2.5%. If she placed the money

for 3 years, how much interest will she earn at the end

of 3 years?

Given:

P = Php 10,000

r = 2.5%

t = 3 years

Solution:

I = Prt

= (10,000) (0.025) (3)

= Php 750

Thus, Issa will earn Php 1,750 worth of interest after 3 years.

Example 2:

JB borrowed Php100 000 from Yani to have his car

repaired. If Yani charges a simple interest of 3%

per annum and JB plans to pay his loan in 6

months, how much interest should JB pay?

Given:

P = Php 100 000

r = 3%

6

t = 6 months or years or 0.5 years

12

Solution:

I = Prt

= (100 000) (0.03) (0.5)

= Php 1500

Example 3:

How much interest will be earned when Php 520 000 is

invested at the rate of 5.75% per year for 90 days. Assume

that there are 360 days in a year.

Given:

P = Php 520 000

r = 5.75%

90

t = 90 days or year or 0.25 year

360

Solution:

I = Prt

= (520 000) (0.0575) (0.25)

= Php 7 475

Thus, Php 520 000 should be repaid including interest that amounts to

Php 7 475.

Compound Interest

To compute for compound interest, we apply the formula,

𝑟

A = P (1 + )nt

𝑛

interest

P = principal

r = rate

n = number of times the interest is compounded per year

t = number of years the amount is deposited or borrowed for

Example 1:

An amount of Php 1500 is deposited in a bank paying an

annual interest rate of 4.3%, compounded quarterly. What

is the balance after 6 years?

Given:

P = Php 1500

r = 4.3%

t = 6 years

n=4

Solution:

0.043 (4)(6)

A = 1500 (1 + )

4

= Php 1 938.84

Assignment

1. Andy borrowed Php 50 000 from Banco Matatag to pay for

her daughter’s tuition. If the bank charges 4.25% interest rate,

how much interest should Andy pay after 3 years?

instrument that promises to pay a simple interest rate of 1.75%

per annum. If Ronald withdraws the money after 9 months, how

much interest will he earn by then?

your bank compounds the interest twice a year at an interest

rate of 5%, how much money do you have in your account at the

end of the year?

There are certain situations when the unknown could be the P, r

and t. Let’s have the following examples:

Services at 2.75% simple interest for 120 days to add to his

funds for house repair. If he was charged Php 3 300 for interest,

how much did Andrew borrow? (Assume that there are 360

days)

Given:

r = 2.75%

120

t = 120 days or years or 0.3333 years

360

I = Php 3 300

Solution:

𝐼

P=

𝑟𝑡

3300

=

(0.0275)(0.3333) Therefore, Andrew borrowed Php 360 000

= Php 360 000

Example 2:

At what rate did Simon invest his money amounting to Php

175 000 if he received Php 2843.75 worth of interest after

6 months?

Given:

P = Php 175 000

I = Php 2843.75

T = 6 months or 0.5 years

Solution:

𝐼

r=

𝑃𝑡

2843.75

=

(175000)(0.5)

= 0.0325 or 3.25%

Thus, Simon invested his money at the rate of 3.25% per year.

Example 3:

How long will it take for an investment of Php 250 000 to

double itself if it is invested at the rate of 8%?

Given:

P = Php250 000

r = 8%

I = Php 250 000

Solution:

𝐼

t=

𝑃𝑟

250000

=

(250000)(0.08)

= 12.5 years or 12 years and 6 months

investment at the given rate of interest

Group Activity:

Complete the entries in the given table: Assume 360 days

1 Php 120 000 1% 5 years (1)

2 Php 50 000 2.8% (2) Php 1 250

3 Php 10 000 (3) 3 months Php 525

4 (4) 3.5% 120 days Php 4 130.75

5 Php 500 000 2.5% 8 months (5)

6 Php 25 000 6.25% (6) Php 1 200

7 Php 1 200 000 (7) 1.5 years Php 20 000

8 (8) 4.20% 90 days Php 18 065.25

9 Php 25 000 (9) 45 days Php 375

10 (10) 2.05% 8 months Php 5 250

Maturity (Future Value) of

Simple Interest

F = P + Is

Where

F = maturity or future value

P = Principal

Is = simple interest

F = P (1 + rt)

Where

F = maturity or future value

P = Principal

r = rate

t = term/ time in years

Example 1:

Find the maturity value if 1 million pesos is deposited in a

bank at an annual simple interest rate of 0.25% after

(a) 1 year and (b) 5 years.

Given:

P = Php 1 000 000

r = 0.25%

(a) After 1 year

Method 1: Method 2:

Is = Prt

= (1000000)(0.0025) (1) F = P (1 + rt)

= 2 500 = (1000000) [1 + (0.0025) (1)]

= 1 002 500

F = P + Is

= 1 000 000 + 2 500 The future or maturity value after 1

= 1 002 500 year is Php 1 002 500

(a) After 5 years

Given:

P = Php 1 000 000

r = 0.25%

Method1: Method2:

Is = Prt F = P (1 + rt)

= (1000000)(0.0025) (5) = (1000000) [1 + (0.0025) (5)]

= 12 500 = 1 012 500

F = P + Is

= 1 000 000 + 12 500 The future or maturity value

= 1 012 500 after 5 years is Php 1 012 500

Maturity (Future Value) of

Compound Interest

F = P (1 + r)t

Where

P = Principal or present value

F = maturity or future value

r = interest rate

t = term/ time in years

Ic = F - P

Example1:

Find the maturity value and the compound interest if P10 000

is compounded annually at an interest rate of 2% in 5 years.

Given: Solution:

P = P10 000 F = P (1 + r)t

r = 2% = 10000 (1 + 0.02) 5

t = 5 years = 11, 040.081

Ic = F - P

= Php 11 040.081 – Php 10 000

= 1, 040.081

compound interest is Php 1 040.081.

Present Value

Simple Interest

P = Future Value

(1 + rt)

Compound Interest

P = Future Value

𝑟

(1 + )nt

𝑛

Example1:

What is the present value of Php 50,000 due in 7 years if money

is worth 10% compounded annually?

Given:

Solution:

F = 50,000

P = 50 000

t = 7 years

(1 + 0.10)7

r = 10%

= 25, 657.91

P=?

Group Activity:

1. Complete the table by finding the unknown.

Principal (P) Rate (r) Time (t) Interest (I) Maturity Value

(F)

60 000 4% 15 (1) (2)

5% compounded annually for 8 years?

Formulas:

Simple Interest Compound Interest

𝑟

I = Prt A = P (1 + )nt

𝑛

Ic = F - P

F = P + Is F = P (1 + r)t

F = P (1 + rt)

P = F__ P = F___

(1 + rt) 𝑟

(1 + )nt

𝑛

Quiz:

1. You want to start saving money. You placed a time deposit in

Bank A for Php 50 000 with an interest rate of 5%. How much

will your saving be after 5 years if:

a) Invested following simple interest rate?

b) If compounded twice a year.

which will give you 5% interest in 5 years. Your target is to earn a

total amount of Php 1,000,000. How much should you invest if

the investment is:

a) Under simple interest scheme?

b) Compounded monthly?

Quiz

3. Find the maturity value and interest if

Php 50,000 is invested

a. at an annual simple interest rate of 5% after

8 years

b. at 5% compounded annually for 8 years

Question to Ponder:

Where people pay by

installment?

Insurance Companies

Car Loans

Home Appliances Installments

House and Lot Installment

Payments by

installment are done

periodically, and in

equal amounts. These

scheme is called

annuity.

Annuity

A sequence of payment made at equal

(fixed) intervals or periods of time.

Payment interval = the time between

successive payments

ways, as follows:

According to payment interval

and interest period

Simple Annuity = an annuity where the

payment interval is the same as the

interest period

the payment interval is not the same

as the interest period

According to Time of Payment

Ordinary Annuity ( or annuity

immediate) = a type of annuity in

which the payments are made at the

end of each payment interval

which the payments are made at

beginning of each payment interval

According to Duration

Annuity Certain = an annuity in which

payments begin and end at definite times.

Ex. installment basis of paying a car,

appliances, house and lot, tuition fees, etc.

the payment extend over an indefinite (or

indeterminate) length of time. Ex. Life

insurance, pension payments

Term of Annuity, t = time between the first

payment interval and the last payment interval

of each payment

of future values of all the payments to be made

during the entire term of the annuity

present values of all the payments to be made

during the entire term of the annuity

Time Diagram

An installment payment of an appliance of P3000 every month

for 6 months

Future Value of Simple

Annuities

To find j:

j = _i_

m

where i = interest

m = number of conversion per year

Example1:

In order to save for her high school graduation, Marie decided to

save P200 at the end of each month. If the bank pays 0.25%

compounded monthly, how much will her money be at the end

of 6 years?

Given:

R = P200

m = 12

i(12) = 0.25% = 0.0025

0.0025

j= = 0.0002083

12

t = 6 years

n = tm = 6(12) = 72 periods

Find F:

Example2:

Suppose Mrs. Remoto would like to save P3,000 at the end of

each month, for six months, in a fund that gives 9% compounded

monthly. How much is the amount of future value of her savings

after 6 months?

Given:

R = P3,000

t = 6 months

i(12) = 9% = 0.09

m = 12

0.09

j= =0.0075

12

n = 6 periods

Find F:

Future Value of General

Annuities

The formula for the future value of general annuity is the same

as that for a simple annuity. The extra step occurs in finding j;

the given interest rate per period must be converted to an

equivalent rate per payment interval.

Example1:

Mel started to deposit P1000 monthly in a fund that pays 6%

compounded quarterly. How much will be in the fund after 15

years?

Given:

R = Php 1000

n = 12 (15) = 180 payments

i4 = 6% = 0.06

m=4

Find F:

Since the payments are monthly, the interest rate of 6%

compounded quarterly must be converted to its equivalent

interest rate that is compounded monthly.

Thus, the interest rate per monthly payment interval is 0.004975

or 0.4975%

annuity using the computed equivalent rate

Example2:

A teacher saves P5000 every 6 months in a bank that pays 0.25%

compounded monthly. How much will be her savings after 10

years?

Given:

R = P5000

n = 2(10) = 20

i12 = 0.25% = 0.0025

m = 12

Find F:

Convert 0.25% compounded monthly to its equivalent interest

rate for each semi –annual payment interval.

Present Value of Simple

Annuities

The present value of a simple annuity is given by:

Example1:

Suppose Mrs. Remoto would like to know the present value of

her monthly deposit of P3000 when interest is 9% compounded

monthly. How much is the present value of her savings at the

end of 6 months?

Given:

R = P3000

i = 9% = 0.09

j = 0.09/12 = 0.0075

n = 6 months

m = 12

Find P:

Example2:

Find the present value if quarterly payments of P2000 for 5

years with interest rate of 8% compounded quarterly.

R = P2000 0.02

i = 8% = 0.08 P = 32, 702.87

j = 0.08/4 = 0.02

t = 5 years

n = 5(4) = 20 payments

m=4

Present Value of General

Annuities

The formula for the future value of general annuity is the same

as that for a simple annuity. The extra step occurs in finding j;

the given interest rate per period must be converted to an

equivalent rate per payment interval.

Example1:

Ken borrowed an amount of money from Kat. He agrees to pay

the principal plus interest by paying P38, 973.76 each year for 3

years. How much money did he borrow if interest is 8%

compounded quarterly?

Given:

R = P38,973.76

i4 = 8% = 0.08

m=4

n = 3 payments

Find: P

Thus, Ken borrowed P100,000 from Kat.

Example2:

Mrs. Reyes would like to buy a television set payable monthly for

6 months starting at the end of the month. How much is the

cost of the TV set if her monthly payment is P3000 and interest

is 9% compounded semi-annually?

Given:

R = 3000

i(2) = 9% = 0.09

n = 6 payments

m=2

Find P:

Quiz

1. Peter started to deposit P5,000 quarterly in a fund that pays

1% compounded quarterly. How much will be in the fund after 6

years?

payable semi-annually for 10 years if money is worth 6%

compounded semi-annually.

P500 at the end of each term for 10 years with interest rate of

5% compounded semi-annually.

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